What’s Really Behind May’s Surging Home Sales

John Whitefoot: Judging by all the headlines alone, you’d conclude that the U.S. housing market is in full recovery mode (it isn’t) and that the U.S. economy is heading in the right direction (it’s not).

Is the hype justified? Not if you dig below the headlines. First, the (so-called) good news. According to the National Association of Realtors, existing-home sales in May climbed 4.9% month-over-month to a seasonally adjusted rate of 4.89 million, up from 4.66 million in April. This marks the second monthly gain in a row. It’s also the fastest pace since October, the last time annualized sales surpassed the five million units mark! (Source: “Existing-Home Sales Heat Up in May, Inventory Levels Continue to Improve,” National Association of Realtors web site, June 23, 2014.)

All good? Not quite. There’s more to May’s existing-home sales data than the numbers at the top of the press release.

First-time homebuyers, a benchmark for how well the economy is doing, accounted for just 27% of all activity, down from 29% in April. The annual decline is even worse. In May 2013, first-time homebuyers accounted for 28% of sales; in May 2012 it was 34%; and in May 2011 it was 36%. Why is this a concern? The 30-year average for first-time homebuyers—and a number economists consider ideal—is 40%! (Source: Schmit, J., “First-time buyers losing out as home sales rise,” USA Today web site, June 29, 2013.)

So who’s propping up existing-home sales? Investors with lots of cash. All-cash sales made up 32% of transactions in May, with individual investors snapping up 16% of existing homes. What was the biggest winner? Homes in the $1.0-million-plus bracket—even though they only account for 2.4% of transactions. The biggest losers? Homes listed up to $500,000—in particular, those under $250,000.

What about new-home sales data? Again, all is rosy on the surface. Fox Business’ headline reports that “New Home Sales Soar to Six Year High in May;” Business Insider’s headline reads “New Home Sales Boom;” while ABC News’ headline proclaims “US New Home Sales Rocket Higher in May!”